Storage Technology v. Cisco Systems, Inc. ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-3673
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Storage Technology Corporation, *
*
Plaintiff - Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Cisco Systems, Inc., *
*
Defendant - Appellee. *
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Submitted: June 16, 2004
Filed: January 26, 2005
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Before LOKEN, Chief Judge, JOHN R. GIBSON, and BYE, Circuit Judges.
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JOHN R. GIBSON, Circuit Judge.
Storage Technology Corporation appeals the district court's1 entry of summary
judgment against it on its various claims against Cisco Systems, Inc. arising out of the
hiring of a number of Storage Technology's employees by Cisco's predecessor,
NuSpeed Internet Systems, Inc. The district court held that Storage Technology's
claims for interference with contractual relations, inducing breach of contract,
conversion, and breach of fiduciary duties failed because Storage Technology did not
come forward with any evidence of recoverable damages. The district court held that
1
The Honorable Joan N. Ericksen, United States District Judge for the District
of Minnesota.
Minnesota has not recognized a claim for “corporate raiding,” or hiring away another
firm's employees. The district court held that the remaining claim, for
misappropriation of trade secrets, was not supported by evidence that satisfied the
requirements of Fed. R. Civ. P. 56(e). We affirm the judgment of the district court.
In November 1999, Mark Cree and Clint Jurgens founded NuSpeed Internet
Systems, Inc., a new computer technology company. Cree and Jurgens's plan was to
develop a product to link computers at one location to data storage networks at other
locations through the Internet or other Wide Area Network using Internet Protocols.
On December 2, Cree and Jurgens offered employment to Mark Schrandt, an engineer
at Storage Technology, which was developing data storage networking products.
Schrandt accepted NuSpeed's offer and gave Storage Technology oral notice on or
about December 3 that he was leaving. He later gave a written resignation effective
at the end of December. Schrandt began work for NuSpeed in January 2000. In
December, while Schrandt was still at Storage Technology, he told four other Storage
Technology engineers, Mark Bakke, Ed Fiore, Tim Kuik, and Dave Thompson, that
he was going to work for NuSpeed, and they expressed interest in following Schrandt.
Schrandt met with them outside of work to discuss NuSpeed, and by mid-December,
these four Storage Technology employees had signed on with NuSpeed. Through
November 2000, NuSpeed hired twenty-two more engineers who were or had been
employed at Storage Technology, as NuSpeed grew to employ seventy-eight people.
In February 2000, a new open Internet protocol was published, called iSCSI
(for "Internet, Small Computer Systems Interface"). NuSpeed quickly began working
on incorporating iSCSI in its product, the SN 5420, which linked storage area
networks over the Internet. In April 2000, NuSpeed announced that it was
developing a device to transmit data using the iSCSI protocol. NuSpeed aspired to
be the first company to bring such a product to market. Cisco Systems, Inc. acquired
NuSpeed in September 2000 in a stock-for-stock transaction in which NuSpeed's
shareholders received $450 million in Cisco stock. Although the SN 5420 was
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indeed the first iSCSI device to market, Cisco never made a profit on NuSpeed, or the
"Storage Router Business Unit," as it was called after the acquisition; as of January
2003, Cisco's operating losses for the unit stood at $50 million.
Storage Technology brought this suit against Cisco, alleging that NuSpeed had
engaged in “corporate raiding” by hiring Schrandt, Bakke, Fiore, Kuik and
Thompson, and the other former Storage Technology employees, alleging that the
employees had gained knowledge at Storage Technology of a device for joining
disparate and otherwise incompatible computer networks and NuSpeed had used that
knowledge to develop a product based on Storage Technology's device. Storage
Technology also alleged claims for interference with contractual relations for hiring
away persons with whom Storage Technology had employment contracts; for
inducing breach of contracts; for conversion of confidential information; for
encouraging breach of fiduciary duties by former Storage Technology employees; and
for misappropriation of trade secrets.
Cisco moved for summary judgment. Cisco denied that NuSpeed
misappropriated any trade secret information or acted improperly in hiring Storage
Technology engineers.
The district court granted summary judgment to Cisco. First, the district court
considered Storage Technology's claim for tortious interference with Storage
Technology's contracts with its employees. The court held that under Minnesota law,
the measure of damages for tortious interference with contract is the amount the
plaintiff could have recovered for breach of the underlying contract. Storage
Technology made no effort to prove the value of the employment contracts allegedly
breached, but pinned its entire case on a theory of unjust enrichment by which it
sought to recover the entire $450 million of value which the NuSpeed shareholders
received from Cisco in the form of Cisco stock. The district court held that the $450
million figure had no relation to the damages suffered by Storage Technology from
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the alleged breach of any of its contracts with the former employees. The tortious-
interference-with-contract claim therefore failed for lack of proof of the element of
damages. The claim for inducing breach of contract required proof of the same
elements as the tortious interference claim and therefore failed with that claim. The
conversion claim failed both because the type of property affected was trade secrets,
which are not covered by the tort of conversion, and because Storage Technology
failed to prove damages. Similarly, the district court held that Storage Technology's
claim for breach of fiduciary duties by Mark Schrandt in December 1999 failed for
lack of proof of damages.
The district court next considered Storage Technology's claim for “corporate
raiding,” or the “systematic and massive program of hiring another company's
employees.” The court held that Minnesota had not recognized a cause of action for
corporate raiding and that Minnesota has disfavored any cause of action that would
inhibit employees' mobility in the workforce, as seen by the disfavor with which
Minnesota regards noncompetition clauses. Accordingly, the district court declined
to fashion a new tort under Minnesota law.
Finally, the district court held that Storage Technology had failed to come
forward with evidence of misappropriation of a trade secret sufficient to meet the
requirements of Fed. R. Civ. P. 56(e), since it relied on assertions by people who had
no personal knowledge of the subjects of their statements. Accordingly, the district
court entered judgment for Cisco on the misappropriation of trade secrets count.
I.
We review the district court's entry of summary judgment de novo, using the
same standard as the district court. Winthrop Res. Corp. v. Eaton Hydraulics, Inc.,
361 F.3d 465, 468 (8th Cir. 2004). Summary judgment is appropriate where there are
no disputed issues of material fact and the moving party is entitled to judgment as a
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matter of law. Fed. R. Civ. P. 56(c). “Thus, where the moving party can point to the
absence of any evidence satisfying a necessary element of a claim, such as damages,
and the non-moving party fails to produce any such evidence, summary judgment is
properly entered.” Meterlogic, Inc. v. KLT, Inc., 368 F.3d 1017, 1018-19 (8th Cir.
2004). We review for abuse of discretion the district court's decision to exclude an
expert's testimony for purposes of determining whether there is an issue of material
fact. Id. at 1019.
II.
Under Minnesota law, the elements of tortious interference with contract are
(1) the existence of a contract, (2) the tortfeasor's knowledge of the contract, (3) the
tortfeasor's intentional causation of a breach of the contract, (4) a lack of justification
for the tortfeasor's action, and (5) damages resulting from the breach. Bouten v.
Richard Miller Homes, Inc., 321 N.W.2d 895, 900 (Minn. 1982). The tort of inducing
a breach of contract, which Storage Technology pleads in a separate count, requires
the same elements. Aslakson v. Home Sav. Ass'n, 416 N.W.2d 786, 788 (Minn. Ct.
App. 1987).
We turn to the question of whether Storage Technology adduced any evidence
to prove its damages for the alleged tortious interference with its employment
contracts.
A.
The district court focused on the nature of damages in a tortious interference
with contract case. Storage Technology has declined to prove damages to its own
business and instead only attempted to establish a right to restitution in the amount
of Cisco's alleged unjust enrichment. Cisco contends, and Storage Technology does
not deny, that Cisco lost money on the NuSpeed product. At the deposition of
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Timothy Schulte, Storage Technology's counsel expressly denied that Storage
Technology claims or has proven lost profits. Instead, Storage Technology contends
it is entitled to $450 million, which was the price Cisco paid for NuSpeed. The
district court held that "damages for interference with contract are limited to those
that might have been recovered for a breach of the contract itself." The court held
that because Storage Technology failed to prove what damages NuSpeed caused,
Storage Technology had not made a showing sufficient to resist summary judgment.
The usual remedy provided by Minnesota law for interference with contract is
to compensate the victim for the damages that resulted from the loss of the contract.
The early case of Swaney v. Crawley, 157 N.W. 910, 911 (Minn. 1916), stated the
principle that the “injured party is limited, as a general rule, to such damages as might
have been recovered for a breach of the contract itself.” Potthoff v. Jefferson Lines,
Inc., 363 N.W.2d 771, 777 (Minn. Ct. App. 1985), modified this statement by
allowing the award of damages for emotional distress in an interference with contract
suit, whereas such damages would not be available in a suit on the contract itself.
Potthoff observed that the trial court had relied on the Restatement (Second) of Torts
§ 774A (1979), which allows loss of the benefits of contract, consequential losses,
and damages for emotional distress, all of which focus on loss to the aggrieved party.
See also Kallok v. Medtronic, Inc., 573 N.W.2d 356, 363-64 (Minn. 1998) (holding
recovery for tortious interference can include costs of litigation to enforce contract).
However, breach of some covenants and duties attendant on the employment
relation entitles the aggrieved employer to restitution. An employee who breaches
a noncompetition or nondisclosure covenant can be required to account for his profits.
Cherne Indus., Inc. v. Grounds & Assoc., Inc., 278 N.W.2d 81, 94-95 (Minn. 1979).
The remedy for breach of the fiduciary duty of loyalty is also restitutionary. See
Miller v. Miller, 222 N.W.2d 71, 78 (Minn. 1974) (remedy for breach of fiduciary
duty of loyalty is imposition of constructive trust).
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Therefore, where the defendant has not merely enticed a competitor's
employees to leave their employment, but also induced them to breach a fiduciary
duty of loyalty or restrictive covenant, the remedy must reflect the underlying wrong.
When the underlying wrong would have supported a claim of restitution, so should
a claim for inducing that wrong. In Cherne, an employee of Cherne left and formed
a corporation, Grounds & Associates, which hired away two other employees. 278
N.W.2d at 87. All three former employees had signed non-competition and non-
disclosure-of-confidential-information covenants, id. at 86, which they breached in
the service of the new corporation. Id. at 88-91. Grounds & Associates argued that
the proper remedy was award of Cherne's lost profits, rather than a restitutionary
award of Grounds's profits. The Minnesota Supreme Court held:
Although damages for breach of contract are traditionally measured by
the nonbreaching party's loss of expected benefits under the contract,
where an employee wrongfully profits from the use of information
obtained from his employer, the measure of damages may be the
employee's gain. Also, this court has specifically found that the violator
of a covenant not to compete may be required to account for his profits,
and such illegal profits may properly measure the damages.
Id. at 94-95 (internal citations omitted). Cherne did not expressly discuss the fact that
it was holding a third party liable for the employees' breach of the noncompetition
covenants, but in a later case the Minnesota Supreme Court referred to Cherne as
implicitly holding that "third-party interference with [a] noncompete agreement is a
tort." Kallok, 573 N.W.2d at 361. Thus, where the interference alleged is
inducement of breach of restrictive covenants or fiduciary duties, the remedy should
mirror the restitutionary remedy available for the breach of the covenant or fiduciary
duty.
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Storage Technology's interference with contract theory is not clear from its
complaint. The complaint's "interference with contractual relations" count only
alleges that Storage Technology had employment contracts with its employees and
that NuSpeed hired the employees without justification, knowing that they would then
terminate their contracts with Storage Technology. It also alleges that NuSpeed
accomplished the hiring by using knowledge about Storage Technology's pay
structure, etc., but it does not pursue this theory before us. Thus, the count in the
complaint appears to allege only hiring of plaintiff's at-will employees. However,
Storage Technology pleads in separate counts that NuSpeed induced Schrandt, Fiore,
Kuik, and Bakke to breach fiduciary duties to Storage Technology by disclosing
confidential information and soliciting Storage Technology employees to leave
Storage Technology. In its brief, it contends that Schrandt breached his duty of
loyalty by recruiting Storage Technology employees for NuSpeed while still in
Storage Technology's employ. In its reply brief, Storage Technology contends that
it had a noncompetition agreement with Schrandt, which he violated. Storage
Technology therefore appears to be pursuing a theory that NuSpeed induced Storage
Technology's employees to breach noncompetition and nondisclosure covenants and
to breach their fiduciary duty of loyalty to Storage Technology.
We conclude that Minnesota courts would allow a restitutionary remedy in a
case in which the interference alleged was inducing an employee's breach of
noncompetition and nondisclosure covenants and fiduciary duties. We further
conclude that Storage Technology is alleging NuSpeed induced such breaches by
Storage Technology's employees. We therefore must ascertain whether Storage
Technology has made a sufficient showing of unjust enrichment to survive summary
judgment.
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B.
Storage Technology's entire evidentiary basis for a restitutionary remedy
consisted of the report of its expert, George Norton, that "Cisco's valuation of
NuSpeed (basically, its key people and storage technology expertise) was $450
million and represents a proper valuation of the damages to Storage Technology and
due to it for the trade secret appropriation, corporate raiding, and breach of contract
and fiduciary responsibilities promulgated." The district court rejected Norton's
opinion as "rank speculation."
The first and most apparent problem with Norton's testimony is that he
attributed the entire value of the NuSpeed acquisition to employees and trade secrets
wrongfully appropriated from Storage Technology, even though NuSpeed had other
assets and employees. Norton did not attempt to value the people or the technology
supposedly belonging to Storage Technology by any means other than by ascertaining
what price Cisco paid for NuSpeed. The undisputed evidence shows that a crucial
aspect of the acquisition was Cisco's desire to obtain NuSpeed's product incorporating
the iSCSI protocol, which had nothing to do with Storage Technology.
Norton opined, "The value inherent in the price Cisco paid for NuSpeed was
in the key employees of NuSpeed who embodied the storage expertise technology
Cisco sought." But Norton testified at his deposition that he did not know what the
technology was. Norton later contended that the value of NuSpeed to Cisco was in
the fifteen key employees named in the acquisition documents. Of these, five are
listed as having come from firms other than Storage Technology. Norton did not
know what percentage of NuSpeed's total employees were from Storage Technology
at the time Cisco acquired the company. He did not know if the deal would have
gone forward if the people listed had not agreed to go to Cisco. Norton testified that
he did not take into account the terms of the employees' contracts with Storage
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Technology. See Nordling v. N. States Power Co., 478 N.W.2d 498, 505 (Minn.
1991)(“The fact that the contract is terminable at will . . . is to be taken into account
in determining the damages that the plaintiff has suffered by reason of its breach.”)
(quoting Restatement (Second) of Torts § 766, comment g (1979)).
Norton was unwilling or unable to answer questions exploring what proportion
of the acquisition price was attributable to what NuSpeed assets. His deposition was
singularly uninformative:
Q: [D]o you believe that StorageTek could include within its damages
the amount that Cisco paid for tangible assets acquired?
A: I don't understand how StorageTek includes things in its damages.
....
Q: And you didn't attempt yourself to value any of those assets that
Cisco was acquiring, whether tangible or intangible yourself, right?
A: I think we had this discussion this morning. Cisco was in the best
position to make that valuation and they did.
Q: And you did not?
A: And they wrote the check.
Q: And you did not, correct?
A: I did not, what?
Q: You did not do an evaluation of the worth of the tangible or the
intangible assets, correct?
A: Yes, I did, that's $450 million. It says right here on page six, the
$450 million price is the best representation of fair-market value for the
tangible and intangible assets represented by all the stock of NuSpeed.
Q: But you did not attempt to determine a worth for the tangible assets,
correct?
A. As I've said, one quick glance at the balance sheet will show that it
is minutiae compared to the price paid for the people and the
technology.
Q: And the price paid because it did exceed the value of the tangible
assets was paying for goodwill then, right? . . .
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A: If you say so. . . . I don't know what the current definition of goodwill
is in the accounting so I can understand it, but again, if you say that's
what it is, I see no reason to argue with you on it. . . .
Moreover, there is crucial evidence, which Norton does not take into account,
that the reason Cisco was interested in NuSpeed was that NuSpeed had begun work
on using iSCSI to access stored data. The Cisco executive who worked on the
acquisition testified:
Q. What made NuSpeed attractive to Cisco?
A: So NuSpeed was the first implementation that we saw of the iSCSI
standard; iSCSI standard was originally proposed by Cisco and IBM,
and we saw that as a[n] early, first-to-market opportunity to enable
storage over [internet protocol].
Nobody contends that Storage Technology had anything to do with the idea of using
software incorporating the iSCSI standard for storage networking. Storage
Technology admitted that no software was ever written for the "SAN Appliance"2--
which it contends was the idea for a storage networking product that NuSpeed stole
from Storage Technology. In fact, iSCSI did not even exist until February 2000, after
Schrandt, Bakke, Thompson, Kuik and Fiore had already left Storage Technology.
Norton did not take into account any value that may have resulted from the
incorporation of the iSCSI standard in the SN 5420:
Q: It [the acquisition price] also included the development work on
NuSpeed's product, the SN 5420, correct?
A: Again, I'd have to go back to the agreement and go through it line by
line to find out exactly what was spelled out in terms of what that
company represented at that point in time. . . .
2
"SAN" stands for Storage Area Network.
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Q: And there are some things that NuSpeed employees developed which
did not include any trade secrets or anything else of StorageTek,
correct?
A: I don't know.
In Alcatel USA, Inc. v. Cisco Sys., Inc., 239 F. Supp. 2d 660, 667-73 (E.D.
Tex. 2002), the court entered summary judgment disposing of a trade secret suit in
which the plaintiff asked to be awarded the acquisition price of the company allegedly
in possession of trade secrets. The court listed the "dubious and tenuous inferences"
that would be required to conclude that certain information was the crucial ingredient
on which hung the whole value of the acquired company, id. at 668, and concluded
that the theory and supporting evidence were too speculative to submit to a jury:
Alcatel fails to apportion the value of its alleged trade secrets from the
approximately $550 million price for which Monterey was purchased by
Cisco. Instead, Alcatel essentially attempts to attribute every penny of
Monterey's purchase price and every penny of the Wavelength Router
technology to the value of its alleged trade secrets. This maneuver,
however, reeks of incongruity and underscores the speculative nature of
Alcatel's alleged damages.
Id. at 671. Storage Technology has done no better a job than Alcatel in establishing
that the purchase price of the acquired company was due entirely, or at all, to the
presence of Storage Technology engineers and knowledge, or in helping the jury
apportion the acquisition price between assets attributable to Storage Technology and
assets having no relation to Storage Technology.
We review for abuse of discretion the district court's decision that expert
opinion is too speculative to be admissible. Group Health Plan, Inc. v. Phillip Morris
USA, Inc., 344 F.3d 753, 760 (8th Cir. 2003). An expert's opinion must be based on
"sufficient facts or data." Fed. R. Evid. 702. The district court should exclude expert
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testimony if it is so fundamentally unsupported that it can offer no assistance to the
jury. Children's Broad. Corp. v. Walt Disney Co., 357 F.3d 860, 865 (8th Cir. 2004).
The district court was well within its discretion in deciding that Norton's testimony
was so uninformed and baseless that it could not assist the jury in the task of fixing
damages.
Storage Technology contends that the fact of damage is certain and only the
amount is uncertain. Under Minnesota law, damages may not be speculative, remote,
or conjectural. Children's Broad. Corp. v. Walt Disney Co., 245 F.3d 1008, 1016 (8th
Cir. 2001). However, once the fact of damages is proved with certainty, the extent
of the damages need only be shown to have a reasonable basis in the evidence. N.
States Power Co. v. Lyon Food Prods., Inc., 229 N.W.2d 521, 525 (Minn. 1975).
Storage Technology points to nothing in the record besides Norton's testimony that
would allow a jury to calculate damages. Cf. Children's Broad., 245 F.3d at 1016-17
(jury could "sort through" evidence of revenues, losses, valuations, and actual and
potential sales to arrive at figure for damages). "When the record contains no proof
beyond speculation to support the verdict," the defendant is entitled to judgment as
a matter of law or summary judgment. Sip-Top, Inc. v. Ekco Group, Inc., 86 F.3d
827, 830 (8th Cir. 1996); see Fed. R. Civ. P. 56(c) (summary judgment appropriate
when moving party would be entitled to judgment as a matter of law).
Storage Technology's failure to produce evidence substantiating any amount
of damages or restitution is fatal to its claim for tortious interference with contractual
relations, as well as to each of its other claims.
We affirm the judgment of the district court.
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